The home of Old Hickory United Methodist pastor Jay Voorhees is owned by his church, which is across the street. / Shelley Mays, The Tennesseean

by Bob Smietana, USA TODAY

by Bob Smietana, USA TODAY

Gaylor, co-founder of the Madison, Wisc.-based Freedom From Religion Foundation, wants a federal court to strike down an IRS rule allowing tax-free housing for pastors.

That rule, known as the parsonage allowance, gives churches an unfair advantage over other nonprofits, Gaylor said. She also said it violates the separation of church and state laws because it essentially means the government is subsidizing housing for ministers by not charging them tax.

"It's unconstitutional," Gaylor said. "We are going after one of the clergy's perks."

A federal judge in Wisconsin recently ruled that Gaylor's nonprofit had standing to sue the government over the housing allowance. That's the first step to getting the IRS rule overturned, she said. But supporters of the clergy housing allowance say the exemption is needed to make sure clergy, who pay self-employment tax, are treated fairly by the government.

The housing allowance is part of a complicated set of rules that govern how ministers and other clergy pay federal income tax.

Ministers such as the Rev. Tom Crow, executive pastor of First Baptist Church in downtown Nashville, are considered to be self-employed, even though they get a church salary.

So they pay federal income tax and self-employment tax. But ministers can label part of their salary as a tax-free housing allowance, which offsets the self-employment tax, Crow said.

"It's basically a wash," he said.

Gaylor disagrees.

She say the IRS rules allow clergy to write off not just their mortgage but also any bills related to their homes, such as a down payment or cable bills.

Leaders of other nonprofits can't get that same break, she said. That means the government is showing favoritism to religion.

Gaylor's group first filed suit against the parsonage allowance in 2010 in California but dropped the suit out of concerns that it lacked standing in that state. It re-filed the suit in Wisconsin last year, and in late August a federal judge ruled that it has standing to go ahead with the suit.

Gaylor said that a trial date will be set for 2014 but she says a ruling on the suit could be made sooner.

Robert Baty, a retired IRS agent from Oklahoma City, hopes that's the case.

Baty has believed for about 30 years that housing allowances are unconstitutional. He once thought they should be allowed but changed his mind after the basketball coach at a Christian school in Oklahoma got a minister's housing allowance.

He said a court has never ruled on whether the parsonage allowance, which dates back to the 1920s, is constitutional.

"A ruling can't come soon enough for me," Baty said.

The implications of the parsonage allowance lawsuit could be far-reaching, said Edward A. Zelinsky, a law professor at Yeshiva University in New York City.

Zelinsky said that the government gives all kinds of exemptions to religious groups. Ministers are exempt from the Americans with Disabilities Act, for example, and the Amish are exempt from paying Social Security and won't be penalized for not buying insurance under the health care reform law.

"If you don't think the parsonage allowance is constitutional - then I don't see how you can say these other exemptions are legal, either," he said.

He says the parsonage allowance is constitutional and disagrees with the claim that the housing allowance is a government subsidy of religion.

Instead, he said, it's one way of keeping government from being too entangled with religion.

"There are no perfect choices here," he said. "When Jefferson wrote about the separation of church and state, he was looking at a world of limited government and modest churches. Today we live in a world of sprawling governments and sprawling church institutions."

The Freedom From Religion Foundation's lawsuit isn't the first challenge to the parsonage exemption.

In 2002, the IRS and Rick Warren, megachurch pastor from Saddleback Church in California, squared off in federal court over his housing allowance. Warrren had claimed more than $70,000 as a housing allowance, and the IRS ruled that amount was excessive and tried to charge him back taxes. Before an appeals court could decide the case, Congress changed the rules governing the housing allowance.

Since 2002, the allowance has been limited to either the fair market rental value of the house or the money actually spent on housing.

And a federal appeals court ruled this past year that the parsonage exemption applies to only one house. That ruling came in the case of Phil Driscoll, a Christian musician and minister who runs Mighty Horn Ministries based in Greensboro, Ga. Driscoll, who has served jail time in the past for tax evasion, had claimed more than $400,000 in housing allowance for a second home. A tax court ruled in 2011 the allowance was legal, but that ruling was overturned on appeal. The Supreme Court turned down Driscoll's request for appeal.

Most ministers don't take mega housing allowances.

The Rev. Jay Voorhees, pastor of Old Hickory United Methodist Church, said the average housing allowance for a Methodist pastor in Tennessee is about $12,000 a year.

Voorhees used to get a housing allowance but now lives rent-free in a church-owned parsonage. He doesn't pay federal income tax on that housing benefit but does have to pay self-employment taxes on the rental value of that house. If the lawsuit is successful, ministers who live in parsonages could have to pay more taxes.

One downside of living in a parsonage is that ministers never build up equity in their own homes, which is why the housing allowance, which gives ministers a tax benefit while allowing them to live in their own homes, has become popular.

"You could go from parsonage to parsonage and end up with nowhere to go when you retire," he said.

Voorhees said he'd prefer to have a housing allowance but says having a parsonage works better for his current congregation.

The upside of living in a parsonage is that he doesn't have to pay for housing. The downside is that he lives in someone else's house.

He'd prefer that ministers be treated as employees and be able to make their own decisions about housing.

"Ministers should be paid a salary and be treated the same as other employees," he said. "I've never understood why ministers are treated differently.

Dave Clayton, pastor of Ethos Church in Nashville, said his taxes were much less complicated when he worked for Lipscomb University than they are now with a church.

He said the housing allowance helps his family, but they still end up paying additional taxes because he is self-employed.

"If the government decides to take it away, I won't feel slighted," he said. "I'm just grateful we had it."